Excise Taxes in the States

July 1, 2011

Taxes on the sale of goods and services are an important source of revenue for state governments within the United States. In 2010, states collected $344 billion or nearly 49 percent of their total tax revenue from sales taxes, and in the past this ratio was even higher. Fifty years ago, states received around 58 percent of their tax revenue from sales taxes, say Thomas Stratmann and William Bruntrager of the Mercatus Center.

Selective sales taxes -- also known as "excise" taxes -- are special taxes or rates that apply to the sale of particular goods or services.

The highest excise tax revenues are collected in Connecticut, Nevada, New Hampshire, Minnesota and West Virginia, with over $600 in excise revenues per capita.

Wyoming stands as the only state with less than $200 in excise-tax revenues per capita.

Excise taxes play an important role in public finance and public policy.

On the finance side, they are an important source of revenue, making up 17 percent of total tax revenue in 2010.

In terms of public policy, the selective nature of these taxes gives state governments a useful tool in discouraging certain types of consumption.

Cigarettes, alcohol and, lately, sugary soft drinks are among the items whose use is influenced or might be influenced by state governments through excise taxation.

Although excise taxes create deadweight losses compared to a no-tax baseline, they are efficient in comparison to prohibition. A further consideration is that, where charging users directly for publicly provided goods and services is costly, excise taxes on complementary goods may be reasonable, as with fuel taxes as a proxy for the use of public roads, say Stratmann and Bruntrager.

Source: Thomas Stratmann and William Bruntrager, "Excise Taxes in the States," Mercatus Center, June 2011.